The Housing and Economic Recovery Act of 2008: An Analysis by Catherine Austin Fitts

Part V – Where Is the
Collateral?

Any government official
asked to come up with a workout plan for troubled financial
institutions, large portfolios of financial assets and
liabilities, and/or places that are financially challenged
first must consider all the constituencies involved. No
matter what his or her goals, an official must choose from
among the options available. Before we judge these
individuals harshly, we must consider what we would do if we
stood in the same shoes.

The challenge that U.S. Treasury
Secretary Hank Paulson faces when working out the problems
with Fannie Mae or Freddie Mac is that a significant number
of mortgages that serve as collateral for U.S.
mortgage-backed securities markets are not real. They do not
exist.

The problem is not that the people who bought the
house and borrowed the money cannot afford to pay it back or
that the house they bought has dropped in value. If these
were the problems, we would not be watching the debt the
U.S. government is responsible for increase by $5 trillion
dollars. We would not be watching the National Bank of Australia announce a 50%
loss rate on their mortgage-backed securities.

When
my company served as lead financial adviser to the Federal
Housing Administration (FHA), we surveyed industry loss
rates to compare them to FHA's high rate of 35%. The highest
we found in the industry was 25%, and this was at the end of
the last housing bubble bust, when loss rates would be
expected to be high. As we due diligenced the FHA
nonperforming and foreclosed portfolios, trying to
understand a 35% loss rate, we started to find symptoms of
fraudulent collateral practices. Indeed, we found portfolios
with 50% loss rates, and the losses had nothing to do with
income levels or housing prices.

Here is a story that I
have told many times before:

"In 1994, after the first
FHA/HUD financial audit was published, a mortgage banker
came to see me. He was a serious engineering type who
clearly worked hard and had mastered the details of his
business. He was distressed, he said. For decades he had
been keeping a tally of total outstanding FHA/HUD mortgage
insurance credit. He had brought printouts of his database
for me. It turned out that the government’s published
financial statements showed the amount outstanding was
substantially less than the actual amount outstanding. He
was sure. I assumed that the guy was crazy. If what he said
were true, then the U.S. Treasury and the Federal Reserve
would have to be complicit in significant fraud, including
securities fraud."

After I began
researching HUD fraud in the late 1990s, I would be
contacted by people with experience with HUD fraud. They
insisted that the same home was being used to create ten or
more mortgages that were placed into different pools. They
alleged that Chase as the lead HUD servicer and the other
big banks were implementing such systems. This was why we
would see the same house default two, three, or four times
in a year, they claimed. FHA mortgages had to be churned
through multiple defaults to generate the cash to keep all
these fraudulent pools afloat. This, they insisted, was all
going to finance various secret government operations and
private agendas.

This issue of collateral fraud was
repeated in other markets. As I started to learn more about
precious metals and the commodities markets, I would hear
story after story about precious metals arrangements in
which what investors really had was a bank credit—there
was no bullion behind the arrangement.

I have come to
believe that the allegations of mortgage collateral fraud
are true—not just for FHA and Ginnie Mae at HUD but across
the board throughout the mortgage markets as well.

What
this means is that Freddie Mac's and Fannie Mae's
obligations must be converted to what is essentially
government debt. Such conversion means that investors simply
don't care if the mortgages have a lien on anything real or
not (at least for the time being). Otherwise, there would
need to be a process by which all the defaulted mortgages
can be sorted through to determine which of the mortgages
are legitimate and which are not.

Creating and managing
such a process would indeed crash the global financial
system. It is hard for a multi-trillion-dollar financial
system to maintain liquidity when contracts and laws are
meaningless.

The challenge for Hank Paulson is that by
increasing the national debt by $5 trillion—whether
collateralized by real estate or by phony paper—he can
delay the day of reckoning, but he cannot cancel it.

Only
one thing can cancel the day of reckoning, and that is a
return to productivity—a reengineering of resources in
households and communities; a revitalization of culture,
education, and markets; a rebuilding of infrastructure; an
integration of new technology and new process; and a shift
away from warfare, centralization, financial fraud, and
organized crime and those who lead and promote it.

Hank
Paulson's hands may be tied, but ours are not. Ultimately,
you and I have the power to change this. So . . . who is
your banker? Who is your farmer? Where is your money?

Part VI – The Tapeworm
Corporation Comes Out of the Closet

President Dwight D.
Eisenhower warned us about a military industrial complex. I
have read that he had originally included Congress in his
speech, referring in a draft to a
congressional-military-industrial complex.

What he was
describing was the ability of Congress to legislate private
profits—to vote dollars for government purposes that would
go straight through government agencies into the coffers of
private corporations, and through those corporations into
the pockets of corporate management and private investors.

Eisenhower must have had an inkling where this was all
going when Bechtel proposed to him during his presidency
that Bechtel, a private corporation, be permitted to own
nuclear weapons. (See the very excellent Friends in High Places: The Bechtel
Storyby Laton McCartney.) As a soldier, unskilled
in manipulating financial markets, I doubt he could fathom
all the various methods and schemes that “the complex”
has employed since that time to transfer government and
household resources to corporate control.

The big
mistake, of course, had preceded Eisenhower. That was the
creation of the Federal Reserve System in 1913, which was to
turbocharge the central banking/warfare model that had
defined the Anglo-American Empire for centuries. Central
banks print money to pay armies and navies. Armies and
navies make sure the money is honored and that profitable
markets and cheap resources are accessible. And around and
around we go.

Authorizing a group of private bankers to
issue our currency, hoard our financial data, and run the
federal government accounts—including the Exchange
Stabilization Fund, the mother of all slush funds—created
a financial system engineered to advantage the large banks
and financial centers at the expense of diversified
production and markets. The wealth those bankers engineered
into private investors' pockets during World World I and
World War II institutionalized the American financial
addiction to weapons purchases and defense contracts that so
deeply frustrated Eisenhower.

Eisenhower was also up
against the profit to be had through a second financial
mechanism that supported the transfer of vast amounts of
public resources into private companies—the black budget.
The National Security Act of 1947 and the Central Intelligence Agency (CIA) Act of
1949 together created a way for congressional
appropriations to be secretly diverted to nontransparent
projects, creating a new flow of real estate, services, and
supplies to be procured from private companies.

Long
after Eisenhower’s warning, in 1980, an executive order
expanded Executive Branch authority to outsource sensitive
work to private contractors. With little or no disclosure or
congressional oversight, the spigot for corporate armies and
intelligence agencies was turned on full blast. Better yet,
these mechanisms could be used—behind the protection of
national security—to run numerous highly profitable,
illegal activities. An additional benefit was technology
transfer. To my knowledge, no one has ever priced out the
extraordinary benefits to private corporations and investors
to be paid on a risk-free basis by the government to learn
and manage the most valuable technology in the world. I will
bet you $1 it is a larger amount than the U.S. national
debt—even after adding another $5 trillion to bail out
Fannie Mae and Freddie Mac.

The best, however, was yet to
come. Marry the back-door financial mechanisms with the
black budget, pour money into this unholy union through
federal appropriations and credit, and leverage the schemes
with financial tools made possible by advanced,
state-of-the-art computers and telecommunications, such as
securitization and derivatives, and—voila!—you have the
ability to keep thousands of corporations and banks alive,
funded, and profitable despite the fact that many of them
have absolutely no economic reason to exist.

Increasingly, revenues and share price of the
corporations and banks in this military-industrial complex
depend on more rules and regulations that guarantee them
market share or drive their smaller, more efficient
competitors out of business. They have the ability to trade
the markets and make strategic decisions with inside
information. They can use government money to take them out
of their private positions and rescue them from their
mistakes. Like the Joy of Cooking cookbook, the
recipes for personal profit could fill hundreds of pages.

In Eisenhower’s day, one would have assumed that this
state of corruption could not continue forever. At some
point, the federal government’s credit would be ruined and
the government would lose the ability to borrow more money.
If Congress simply votes to borrow more and more money for
corporations and banks and various other private interests,
and that money is used in ways that are not economic—that
is, they do not create the value necessary to pay back the
debt—at some point, the game has to stop? Right?

Well,
no, not necessarily. With enough weaponry, it can keep going
so long as the folks with the weapons want it that
way. Dick Cheney gave us the heads-up when he said,
“Deficits don’t matter.” We just have to use force to
finance more economic waste. As we steal from the healthy to
finance the unhealthy, there is more death—of people,
healthy enterprises, communities, animal species, and our
environment. The more we steal, the more dependent on
stealing we become, which means the more we need to steal.
The more that success at stealing (as opposed to
productivity) defines the winners, the more people and
organizations convert to stealing or to investing in those
who do. It is the spiral down, not of markets but of
life. It is, as one astute commentator on the
environmental aspects described, “the death of birth.”

So what has evolved is a corporate and banking model to
run the planet that has no connection whatsoever to
fundamental economics or business. It is not efficient, it
is not transparent, it does not compete, and it is not
productive. It has absolutely nothing to do with capitalism
or free markets or free enterprise—although it claims
these words for branding purposes. It has the economic
benefit of fantastic increases in productivity from
technology, all of which have been incorporated within its
control without helping the model achieve basic productivity
or overall sustainability. Technology has made the
corporation a more powerful financial vacuum cleaner rather
than a source of real wealth. For several years, I have
referred to this model as an integral part of Tapeworm economics. So, for easy
reference, let's refer to the model as a "Tapeworm
corporation."

The Tapeworm corporation works like this:
Working alone or with others in a trade group, the Tapeworm
corporation arranges for its well-paid lobbyists to write
and legislate new government regulations and laws that
guarantee it a market or market share. The lobbyist and
various beneficiaries of the corporations' largesse fund the
campaign contributions that help make the system go. The
corporation gets government contracts, often on a
no-bid,"cost-plus" basis, which guarantees profits and
encourages overspending. The corporation may also make
government purchases or receive industry-wide subsidies that
also generate revenues or tax exemptions and benefits that
shelter income. It uses government credit to attract and
command global capital at low cost. The astute participant
in this system can even use government enforcement to wipe
out its competitors. In the worst cases, honest and ethical
people in their way are forced out, harassed, or killed.

Let's say our corporation loses money. If it is a
financial institution, it simply has the government or the
central bank arrange more borrowings that can be loaned back
to the government at a built-in profit or, in the worst
instances, bail it out using the "too big to fail"
justification. If it is a defense contractor, more contracts
and purchases can be arranged. In all cases, our corporation
enjoys government intervention to prop up its stock prices
and debt in the open market, ensuring it a significantly
lower cost of capital. The resulting profits fund rich
compensation to hire the best and brightest people, field
lots of lobbyists to keep the gravy train going, and pour
money into the coffers of foundations, universities, and
not-for-profits that provide affirmation of the corporate
credibility. Our corporation and its leaders are great
philanthropists!

A simple, clear picture of the real
workings of this Tapeworm model has been challenging to
communicate. The model has been obscured by an enormous
amount of legal and operational complexity and financial
engineering. A great deal of time and effort, financed by
those who most benefited, was spent spinning the illusion
that the Tapeworm corporation was efficient and productive.
And, in all fairness to those who have served as corporate
apologists, some of what was going on was hidden behind the
nontransparency of national security law and covert
operations and money laundering. For those who want a
detailed case study, see “Dillon, Read & Co. Inc. and the Aristocracy
of Stock Profits.”

The average person could not
believe that the largest, most prestigious Wall Street banks
and investment houses were engaged with Washington in
managing the largest capital market in the world—the U.S.
mortgage markets—on a criminal basis.

That was too much
to swallow.

Until now.

The real model has come out of
the closet. Whereas the last year of Wall Street bailouts
were making things clearer, the Housing and Economic
Recovery Act of 2008 now leaves no room for doubt. The Act
could not be more blunt about infinite government subsidy
funded with infinite debt benefiting the private few. The
Tapeworm corporation is fully engorged.

The American
taxpayers are, in essence, guaranteeing $5 trillion of
Fannie Mae and Freddie Mac debt. The Federal Reserve stands
by to subsidize Fannie's and Freddie's stock in the stock
market. Fannie and Freddie continue to pay dividends to
their shareholders. All the profit goes to the shareholders
and management. The taxpayers get no compensation or payback
for saving all of Fannie and Freddie’s equity and
essentially guaranteeing their income. The management of
Fannie and Freddie get to keep all their compensation and
bonuses. They get to spend as much as they want on more
lobbyists and law firms. They and their foundations can
continue to hand out money to universities and
not-for-profits.

This all ensures that Fannie Mae and
Freddie Mac can continue to use the federal credit to
centralize and control the U.S. mortgage market.

What
Fannie Mae and Freddie Mac do get is a new regulator. After
reading the scope of work for the new regulator outlined in
the Act, it is not clear to me what authority and scope is
left for their board of directors. The boards essentially
have all liability and no power. The management must do
whatever the regulator says, and the regulator has the
ability to micromanage no end, checked only by a Congress
that can also micromanage no end. We can reasonably expect
Fannie Mae's and Freddie Mac's payrolls and partnerships to
continue to expand with their market share. A lot of
constituencies are likely to get fed from this new back-door
spigot.

But perhaps that is only fair. After all, the
federal government represents a source of infinite capital
that—unlike pesky shareholders—requires no return. The
government only requires that you do whatever they say, pay
their friends, and send financing and profit wherever they
tell you.

The out-of-the-closet Tapeworm corporation is a
more powerful, sophisticated version of the old Tapeworm
corporations that were common in Washington housing
circles—the HUD property management companies that were
sometimes referred to as CIA or Department of Justice (DOJ)
“proprietaries.” The management would talk as if they
were in charge. The investors would talk as if they
were in charge. And the folks from the CIA would talk as if
they were really in charge. At the mercy of this
invisible matrix structure, the old-style HUD property
management company lacked clarity on missions or decisions,
and the resulting culture was confused and unproductive at
best. It all left you scratching your head wondering who
“they” really were.

The housing bill has put forward
the most explicit description yet of the true corporate
model prevailing in America—congressionally legislated
businesses with central-bank-determined stock prices.

It
is a fascinating combination of friendly fascism and
multiple personality disorder. Now that the fundamental
nature of the Tapeworm corporation is out of the closet and
clear, keeping it afloat will require a mind-numbing
combination of global force to maintain financial liquidity,
plus global propaganda and payola to preserve its brand.

In 1994, I was deep in conversation with a technologist
who managed our server security and firewalls for my
investment bank. We started to talk about what would happen
as the explosion in information and communications
technology increased the learning metabolism within the
economy. At one point, he got up to call a physicist he knew
at Lawrence Livermore Laboratory to ask him what happened
when the learning metabolism rose in a system. After
conversing with the physicist, he returned with this
warning. "He said, 'When the metabolism rises, the rate of
entropy increases.'”

*************

Mapping
The Real Deal is a column on Scoop supervised by
Catherine Austin Fitts. Ms Fitts is the President of
Solari, Inc.
http://www.solari.com/. Ms. Fitts is the former
Assistant Secretary of Housing-Federal Housing Commissioner
during the first Bush Administration, a former managing
director and member of the board of directors of Dillon Read
& Co. Inc. and President of The Hamilton Securities Group,
Inc.

The Solari Report's mission is to help you build wealth in ways that build real wealth in the wider economy. We believe that personal and family wealth is a critical ingredient of both individual freedom and community health and wealth.

Contact Catherine Austin Fitts

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